AI and Hourly Billing: How to Avoid the Perfect Pricing Storm

This is a Guest Post written by pricing expert, Richard Burcher, Managing Director of Validatum about how to avoid the trap of seeing efficiency combined with hourly billing result in margin erosion, and instead to use AI to increase productivity and boost law firm income.

The article was written ahead of a Validatum conference this summer at the offices of CMS Cameron McKenna in London and the survey data below is from that audience.

We have been thinking about AI from a pricing perspective for some time, so earlier this week we picked up that theme for the latest bi-monthly Validatum Pricing Forum.

We were a little surprised (pleasantly) at the numbers (35) given what we thought was the relatively niche title of the session: ‘The perfect pricing storm; artificial intelligence and hourly billing.’

We took the opportunity to poll the audience with several live on-screen and anonymous questions, the results for which took us by surprise.

Data: Validatum Survey

And…

Data: Validatum Survey

Clearly the audience believes that AI is going to make a significant impact on their law firms and those firms that are not already embracing AI technology are looking at it. This is a good start. Now onto the questions about billing and AI.

AI and Billing

The fundamental premise of the session was a fairly straightforward one: without very careful thought around pricing strategy, firms that rush headlong into the new technology run the risk of a double whammy: the cost associated with investing in the technology and some fee earners finding that their bread and butter work (e.g. rudimentary document review) can be done in a small fraction of the time that they would normally devote to cranking out billable hours.

Result? More expense and less revenue. Not something to get particularly excited about on the face of it. Yet, the picture is neither so clear cut, nor that negative in reality.

Rick Seabrook, the European managing director of Neota Logicpresented the first part of the session (also see recent AL interview). He outlined the different kinds of AI clustered under that nomenclature and then proceeded to outline some of the uses and applications to which the new software is being put by law firms in the UK and the US.

We then outlined a number of initiatives that we believe that law firms could usefully think about either as a precursor to, or at the very least in conjunction with the deployment of AI, or indeed any technology that will result in work streams being undertaken more efficiently, for which one can almost inevitably read: ‘a reduction in billable hours.’

Fundamentally, we think that this is a timing issue and that law firms are going to need to approach adoption of AI in two stages.

Moving to the endgame, Stage 2 will necessitate systemic change to the way that some services are currently provided. Clients do not mind paying and even paying very solidly for the cerebral, strategic and experience-driven advice, capable of being provided by experienced and seasoned partners. They are considerably less willing to pay for things that they regard as procedural and generally ‘low-rent’.

This isn’t necessarily a bad thing, unless you are in the early stages of your career, as firms are going to need more and more senior people in order to deliver what clients regard as real value.

From the firm’s perspective, this should be recognised as both a problem and an opportunity, the opportunity being for firms to simultaneously offer cost savings and efficiency on the procedural work, but take an extremely robust view on the pricing of work undertaken by senior people. In so doing, there is the potential to achieve some set-off.

Meanwhile, Stage 1 will involve a number of strategies to protect margins while the more systemic changes take shape.

To begin with, we should be cognisant of the pricing life-cycle, which runs broadly in tandem with the traditional innovation/adoption life-cycle and traces the path of: innovators, early adopters, early maturity, late maturity and laggards.

The pricing life-cycle equivalent of recording the revenue and profit curves follows a similar pattern with: introduction, growth, maturity and decline.

Put simply, there is an opportunity for early adopters and innovators to preserve reasonable margins while the use of the technology remains relatively novel and sparsely distributed.

There is an important distinction between doing the same thing more efficiently versus using the technology to do new stuff. The technology will have to be reimagined so that old work is done faster and new revenue streams are opened.

In other words, simply doing the same jobs that have always been done, but doing them faster and more efficiently will result in a substantial reduction in revenue (if a firm remains stuck with the hourly billing system).

One way to address this is to replace revenue with volume. For example, the largest employment law firm in the US, Littler Mendelson has developed [with Neota Logic] subscription-based cloud software that any employer (including those that are not clients of the firm) can log into, enter various information and have the software automatically produce a report advising whether the particular person the employer is concerned about is technically speaking an employee or an independent contractor, with all the attendant income tax, pensions and related implications set out for them to consider.

Since the software was made available six months ago, it has been accessed (and paid for) thousands of times, mostly by companies that are not (yet) clients of the firm in the traditional sense.

There are many other initiatives that firms can deploy in both the short and medium term to mitigate the effects of the introduction of technology that achieves greater efficiencies and cost savings from the client’s point of view, but which will inevitably financially harm those firms that retain a significant dependence upon hourly billing as the predominant pricing model.

To conclude: AI has arrived as a technology in the legal market and it will only likely grow in use, the next step is to understand how to use it to drive revenue and profits. If law firms can move beyond the hourly-billing model and be imaginative in their use of AI then the benefits can be considerable.

Artificial Lawyer welcomes guest posts from all those interested in AI and advanced legal tech and its impact on the legal market.

If you have an article, or blog post, or presentation on the subject that you would like to share please email: Richard@Tromansconsulting.com